PayGo calculates the average cost of an inventory item by using this equation:
total value (the last cost multiplied by current quantity on-hand) of the inventory item (which includes allocated freight on POs)
– divided by –
the current quantity on-hand of the inventory item
When you purchase more of the same item, the value of the inventory increases by the purchase cost. Purchasing more items on POs may change the average cost per item.
Selling items does not change the average cost per item.